The recent case of Bilta (UK) Ltd (in Liquidation) v Royal Bank of Scotland plc and Mercuria Energy Europe Trading Limited [2017] EWHC 3535 (Ch) (Bilta) declined to follow the ENRC case on an important aspect of litigation privilege. The judge observed that "one has to take a realistic, indeed commercial, view" about the factual foundation for privilege claims.


A brief recap on the ENRC decision insofar as it relates to litigation privilege

Much ink has been spilled about the decision in Serious Fraud Office v Eurasian Natural Resources Corporation Ltd [2017] EWHC 1017 (QB) (the ENRC case). The ENRC case concerns claims to legal professional privilege over work product created by ENRC's external lawyers during an internal investigation that took place in the wider context of a criminal investigation by the UK Serious Fraud Office (SFO).

In the ENRC case, the company asserted both legal advice and litigation privilege over work product, including notes of witness interviews produced in the course of an internal investigation conducted by its external lawyers.

There are three necessary conditions for litigation privilege to apply to confidential communications, namely:

  • litigation must be either in progress or reasonably in contemplation
  • the communications must have been made for the sole or dominant purpose of conducting the contemplated litigation
  • the litigation must be adversarial, not investigative or inquisitorial.

In the ENRC case, the company's claims to litigation privilege fell at the first hurdle: Andrews J found that an SFO investigation is a preliminary step before any decision to prosecute is taken and therefore litigation (in the form of a prosecution by the SFO) was not reasonably in contemplation. This meant that Andrews J did not have to consider whether the second condition for litigation privilege was present: namely whether the work product was prepared for the sole or dominant purpose of conducting the litigation.

Andrews J nonetheless did consider the point and found that ENRC's decision to co-operate with the SFO would have been fatal to any claim for litigation privilege it may have had. The court held that the main purpose of ENRC's internal investigation was to establish the facts and prepare for any future SFO investigation. In addition, ENRC intended to co-operate with and show certain documents to the SFO. These intentions were inconsistent with the work product being prepared for the dominant purpose of litigation. In the recent decision of Bilta, the Chancellor of the High Court, Sir Geoffrey Vos, took a different view from Andrews J in relation to the second condition for litigation privilege.

The Bilta decision

Bilta made an application for disclosure of documents (including transcripts of witness interviews of current and former employees of RBS and its energy trading subsidiary, Mercuria) generated in an internal investigation by RBS's external lawyers in the wider context of a tax investigation by the UK tax authorities, the Commissioners for Her Majesty's Revenue and Customs.

RBS and Mercuria were involved in trading carbon credits and had reclaimed Value Added Tax from HMRC as input tax. In 2010 HMRC began a general investigation into VAT fraud in the carbon credits industry. RBS co-operated with the HMRC investigation and provided HMRC with answers to questions as well as certain documents.

In March 2012, HMRC wrote to RBS advising that it had sufficient evidence to deny RBS's claim to input tax on the basis that RBS and Mercuria knew or ought to have known that the relevant transactions were fraudulent (the HMRC Letter). The HMRC Letter made it clear that HMRC had not made a final decision to proceed with a tax assessment and that RBS would have the opportunity to make written submissions. Shortly after receiving the HMRC Letter, RBS instructed external lawyers to advise the bank on its dispute with HRMC. The external lawyers commenced an internal investigation.

HMRC provided various extensions of time for RBS to make submissions. In order to avoid any tax assessment becoming time barred, HMRC issued a preliminary tax assessment while continuing to assert that it would give full consideration to the written response it had invited RBS to make before making a final decision.

On 28 January 2014 the external lawyers issued their investigation report and supplied it to HMRC on the grounds that legal privilege was not waived.

On 8 June 2015, Bilta issued a claim against RBS and Mercuria seeking compensation as a result of their alleged dishonest assistance in a Missing Trader Intra-Community (MTIC) fraud. Bilta alleged that RBS and others had had shut their eyes to obvious fraudulent activity. In the context of those proceedings, Bilta applied for disclosure of the transcripts of the witness interviews that had been generated by RBS's external lawyers in the course of the internal investigation.

Did litigation privilege apply?

In Bilta, the parties agreed that two of the three conditions for litigation privilege were met.

First condition:

Litigation must be either in progress or in contemplation. This condition was conceded. The contemplated litigation was a tax assessment by HMRC in respect of over-claimed VAT.

Second condition:

The communications must have been made for the sole or dominant purpose of conducting the contemplated litigation. This was the core issue in the case.

Third condition:

The litigation must be adversarial, not investigative or inquisitorial. This condition was conceded. The tax assessment was adversarial.

In order to succeed in its claim for litigation privilege, RBS therefore had to establish that the witness transcripts were made for the sole or dominant purpose of the litigation.

In the ENRC case, Andrews J held that "documents created with the specific purpose or intention of showing them to the potential adversary in litigation are not subject to litigation privilege" and that "the dominant purpose for which those documents were created was to enable reports to be prepared to show to the SFO and presentations to be made to the SFO, at a time when the relationship was collaborative rather than adversarial". Bilta relied on these observations to assert that the transcripts of witness interviews were not made for the sole or dominant purpose of conducting the contemplated litigation.

Bilta identified various duties and obligations that RBS owed to HMRC:

  • its general duties and obligations as a tax payer
  • its promise to share the investigation report by its external lawyers with HMRC
  • its requirement to comply with its own Codes of Practice which included obligations to:
    • provide HMRC with a full and detailed account of the relevant facts concerning VAT deductions
    • communicate with HMRC on the basis of "openness, transparency and full disclosure"
    • work collaboratively with HMRC to achieve early resolution and certainty.

Bilta also submitted that relationships between large corporates and government authorities are fundamentally different in nature from those between parties to ordinary litigation as a result of which the HMRC Letter was not analogous to a letter before claim.

The decision

The court accepted RBS's submission that assembling evidence to ascertain the strength of one's position was an ordinary part of litigation and not a separate purpose - and that an intention to dissuade a counterparty from pursuing a claim was inseparable from the wider purpose of conducting litigation.

The Chancellor held that the HMRC Letter was analogous to a letter before claim in civil proceedings and that litigation was in contemplation from that point in time. After receipt of the HMRC Letter, RBS had appointed external lawyers to advise them on this dispute and believed it was unlikely that the bank would persuade HMRC not to proceed with the tax assessment. Although RBS took steps to establish a good relationship with HMRC and comply with its various duties and obligations owed to HMRC, Vos J found that "the ostensibly collaborative and cooperative nature of RBS's interactions with HMRC" did not change the position that the investigation was being conducted for the dominant purpose of litigation. RBS's collaborative and cooperative conduct towards HMRC was subsumed under the overarching purpose of defeating the tax assessment.

Vos J stated that "one has to take a realistic, indeed commercial, view of the facts". RBS had instructed lawyers and incurred legal fees because "fending off the assessment was just part of the continuum that formed the road to the litigation that was considered … almost inevitable".

There are important differences between the ENRC and Bilta cases. Equally, there are important correspondences. Both cases:

  • concern corporates conducting internal investigations in the wider context of investigations by government authorities
  • concern corporates providing a degree of co-operation to government authorities with a view to influencing their decisions
  • involve the assertion of litigation privilege over notes of witness interviews.

As a result of these correspondences, Bilta creates a conflict in the authorities as to whether notes or transcripts of witness interviews prepared in the above circumstances will meet the dominant purpose test.

Commentary

Companies typically conduct internal investigations so that they can either take legal advice about their rights, duties, obligations or legal risks in a particular scenario, or prepare to bring or defend litigation. This applies equally in the context of investigations by government authorities, where the corporate will wish to obtain legal advice about its rights, duties, obligations and legal risks arising from the alleged conduct under government investigation, or prepare to plead guilty to or defend (or seek to compromise) possible enforcement proceedings.

Corporates necessarily act through individuals and therefore most internal investigations will include conducting interviews with current or former employees, officers or directors of the company (as well as third parties). The tension is that transcripts or notes of witness interviews generated in these circumstances may not attract legal advice or litigation privilege notwithstanding that the communications would as a practical matter be prepared for the purpose of obtaining legal advice or bringing or defending litigation and therefore apparently fall within the different rationales for attracting these privilege protections.

In the case of Bilta, the court treated the HMRC Letter as the watershed moment at which a tax assessment was in contemplation even though a final decision about whether to proceed had not expressly been taken. In the ENRC case the court held that the investigative phase was distinct and that no prosecution was in contemplation until both the evidential and public interest tests required for a prosecution had been met, or the corporate became aware of self-incriminating material substantiating the allegation. The ENRC approach is unsatisfactory and is not aligned with how corporates evaluate and manage legal risk in the context of government investigations. It would be unrealistic for a corporate to treat a criminal investigation as "inquisitorial" when (to borrow the metaphor used in Bilta) it is part of a continuum on the road to potential criminal liability.

Furthermore, it does not align with when litigation privilege arises in the context of civil proceedings where litigation merely has to be in contemplation, not justified by reference to standards of evidential sufficiency. When looking at the purpose of privilege and why communications should attract privilege, "it is equally necessary, to use a vulgar phrase, that [a company, not just an individual] should be able to make a clean breast of it to" its lawyer. In order that the company can do that it needs to conduct investigation interviews. In our view those interviews should attract privilege so that a company is not disadvantaged when compared to an individual. Nor should a company be worse off when looking at potential criminal proceedings than if civil litigation was in contemplation, in fact clearly given the nature of the penalties the reverse should be the case. The position otherwise is that a corporate is least protected when it is most exposed.

In relation to the narrow point of whether a communication is made for the sole or dominant purpose of litigation, the court in Bilta was right to treat the steps taken by RBS and Mercuria to fend off the tax assessment as part of a continuum that formed the road to litigation and the collaborative conduct towards HMRC as subsumed under the overarching purpose of defeating the tax assessment. This approach aligns the legal position with reality. As stated in Bilta, ascertaining the strength of one's position is an ordinary part of litigation and not a separate purpose. Andrew J's comment about co-operation with the SFO being fatal to a claim for litigation privilege fails to appreciate this context. The ENRC decision risks disincentivising corporates from co-operating with the authorities, which may be contrary to their preferences and those of the authorities.

The ENRC decision is under appeal to the Court of Appeal. We would welcome a decision that recognises that work product generated in the context of criminal and regulatory investigations should have the same privilege protection as work done in preparing to bring or defend civil proceedings.

Key contacts

Nichola Peters

Nichola Peters

Partner, Head of Global Investigations/Inquiries
London

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Michelle de Kluyver

Michelle de Kluyver

Partner, Global Investigations
London, UK

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